Determinants of the incidence of U.S. Mortgage Loan Modifications

This paper combines data on the performance of mortgage loans with detailed borrower, neighborhood, and property characteristics to examine the factors that determine the outcomes of seriously delinquent loans. We employ multinomial logit models in a hazard framework to explain how loan, borrower, property, servicer and neighborhood characteristics affect which of the following four outcomes results from a seriously delinquent loan: (1) the borrower cures the delinquency; (2) the borrower and lender agree to modify the loan; (3) the borrower suffers a liquidation (short sale, deed in lieu, foreclosure auction sale or REO); or (4) the loan remains delinquent. In particular, we focus on mortgage modification. We find that the outcomes of delinquent loans are significantly related to: current LTV, FICO scores, especially risky loan characteristics, the servicer of the loan, neighborhood housing price appreciation, and whether the borrower received foreclosure counseling.     

Strategic default,workout, and commercial mortgage valuation

This paper extends existing equilibrium commercial mortgage pricing models by endogenizing negotiated workout into the usual noncooperative lending game. Workout is a feasible subgame strategy for the lender to play whenever foreclosure transaction costs exist for either party to a loan transaction. In particular, negotiated workout solutions Pareto dominate the foreclosure alternative when default occurs. To obtain our results, we embed a cooperative bargaining game within a noncooperative mortgage loan/default game. We also address the valuation wedge problem that occurs when foreclosure transaction costs are introduced. Through the notion of replacement game equilibrium, we find symmetric mortgage pricing solutions that eliminate the valuation wedge and thus suggest that lending will occur in commercial real estate mortgage markets even when foreclosure transaction costs exist.     

Legal Restrictions in Personal Loan Markets

This study examines the pricing of personal loans in the form of second mortgages to determine whether state-specific default laws have an effect on the availability and cost of that debt. We examine the pricing of loans to higher risk borrowers and whether borrowers in states that limit lender ability to seek default remedies pay higher credit costs. Our results indicate that, for the most part, lenders rationally price loans to higher risk borrowers. However, when we focus on borrowers with low credit scores, the results indicate that mean actual loan rates are higher than those predicted by our model. The results also indicate that state-specific default laws have an effect on the price of credit. Finally, the results show that there is a greater degree of error in the pricing of second mortgage loans to borrowers with low credit scores than to borrowers with high credit scores.     

A lender-based theory of collateral

We consider an imperfectly competitive loan market in which a local relationship lender has an information advantage vis-à-vis distant transaction lenders. Competitive pressure from the transaction lenders prevents the local lender from extracting the full surplus from projects. As a result, the local lender inefficiently rejects marginally profitable projects. Collateral mitigates the inefficiency by increasing the local lender's payoff from precisely those marginally profitable projects that she inefficiently rejects. The model predicts that, controlling for observable borrower risk, collateralized loans are more likely to default ex post, which is consistent with the empirical evidence. The model also predicts that borrowers for whom local lenders have a relatively smaller information advantage face higher collateral requirements, and that technological innovations that narrow the information advantage of local lenders, such as small business credit scoring, lead to a greater use of collateral in lending relationships.     

Are Commercial Mortgage Defaults Affected by Tax Considerations?

We study whether tax considerations are an important determinant of commercial mortgage default. We also study whether large lenders are better informed, or better at interpreting information for lending purposes, and hence have lower foreclosure rates; whether lenders have more information on larger borrowers than smaller borrowers, and hence have lower foreclosure rates on larger loans; and whether commercial mortgage defaults are related to debt service coverage and loan-to-values, both initial and contemporaneous. The paper’s main findings are fourfold. First, holding all else equal, there is evidence that tax considerations influence investors’ decisions about when to “put” assets to lenders. The results are consistent with the argument of Constantinides (J Financ Econ 13:65–89, 1984). Second, the evidence suggests that large lenders are especially knowledgeable about commercial mortgage borrowers and commercial property markets, in that they have lower foreclosure rates than smaller lenders. Third, on the question of whether lenders have more information on larger borrowers than smaller borrowers, we find that larger loans have, on average, lower default rates than smaller loans. Fourth, the findings suggest that lower default rates are associated with higher debt service coverage ratios, both initial and contemporaneous.     

Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis

We examine whether securitization impacts renegotiation decisions of loan servicers, focusing on their decision to foreclose a delinquent loan. Conditional on a loan becoming seriously delinquent, we find a significantly lower foreclosure rate associated with bank-held loans when compared to similar securitized loans: across various specifications and origination vintages, the foreclosure rate of delinquent bank-held loans is 3% to 7% lower in absolute terms (13% to 32% in relative terms). There is a substantial heterogeneity in these effects with large effects among borrowers with better credit quality and small effects among lower quality borrowers. A quasi-experiment that exploits a plausibly exogenous variation in securitization status of a delinquent loan confirms these results.     

Breakeven Determination of Loan Limits for Reverse Mortgages under Information Asymmetry

Since the loan limit of a reverse mortgage is a major concern for the borrower as well as the lender, this paper attempts to develop an option-based model to evaluate the loan limits of reverse mortgages. Our model can identify several crucial determinants for reverse mortgage loan limits, such as initial housing price, expected housing price growth, house price volatility, mortality distribution, and interest rates. We also pay special attention to the important implication of mortgage lenders’ informational advantage over reverse mortgage borrowers concerning housing market risk. In reverse mortgage markets, the elderly borrowers typically hold far less, relative to the lenders, or no information about the lenders’ underlying mortgage pools. Such information asymmetry leads these two categories of market participants to generate different perspectives on the risk of the collateralized properties, which can be identified to be important in determining the maximum loan amounts of reverse mortgages. We further find that the maximum loan amount of a reverse mortgage decreases in the correlation between the returns on the pooled underlying housing properties but increases with the number of the pooled mortgages.     

So what do I get? The bank's view of lending relationships

While many empirical studies document borrower benefits of lending relationships, less is known about lender benefits. A relationship lender's informational advantage over a non-relationship lender may generate a higher probability of selling information-sensitive products to its borrowers. Our results show that the probability of a relationship lender providing a future loan is 42%, while for a non-relationship lender, this probability is 3%. Consistent with theory, we find that borrowers with greater information asymmetries are significantly likely to obtain future loans from their relationship lenders. Relationship lenders are likely to be chosen to provide debt/equity underwriting services, but this effect is economically small.     

A RECONSIDERATION OF DISCRIMINATION IN MORTGAGE UNDERWRITING WITH DATA FROM A NATIONAL MORTGAGE BANK

This paper, analyzing over 12,000 conventional and FHA/VA loan applications to a national mortgage lender in the 1989–1990 period, argues that mortgage denials occur only in a minority of cases, where the borrower has not learned the lender's underwriting rules in advance. Widespread borrower foreknowledge of such rules is demonstrated by a discriminant finding that 9 of 10 borrowers correctly choose whether to apply under FHA vs. conventional programs, based on financial and equity characteristics. This contrasts with the far lower ability of econometric models to identify approval/denial outcomes. It is revealing that denials on the basis of credit problems, the only important information generally not available until post application, account for most racial/ethnic differences and borrower education affects the probability of approval of government insured loans more than loan to value. Contrary to common assumptions, race differences in FHA/VA lending a re at least as pronounced as in conventional lending; and outcomes for Asians, correctly measured, diverge as much from outcomes for whites, as do outcomes for Hispanics and African American.     

Optimal Stopping and Losses on Subprime Mortgages

Lender losses on mortgage loans arise from a two-stage process. In the first stage, the borrower stops making payments if and when default is optimal. The second stage is a lengthy and costly period during which the lender employs legal remedies to obtain possession and execute a sale of the collateral. This research uses data on subprime mortgage losses to explore the role of borrower and collateral characteristics, and local legal requirements, as well as traditional option variables in the decisions of borrowers and lenders. Although subprime borrowers default earlier, which should reduce lender losses, these borrowers, nevertheless, impose greater realized losses on mortgage lenders.     

Cross-ownership and collateral in lending

Information asymmetry is a major obstacle in both formal and informal loan markets. However, when a borrower and a lender are connected via cross-ownership, this obstacle can be significantly reduced. Cross-ownership enables lenders to collect more concrete and precise information about borrowers, and this lowered information asymmetry reduces the likelihood that the lender will require the borrower to provide collateral. Using a data set of 1091 intercorporate loans from China, we find strong support for the prediction that cross-ownership between lenders and borrowers lowers the collateral requirements by more than 50%. This relation is more pronounced for informationally opaque borrowers and for lending firms with a controlling stake in the borrowing firms.     

A Theoretic Analysis of Extent of Lender Participation in a Participating Mortgage

A participating mortgage is a loan in which a lender accepts a below-market coupon rate in return for a share (participation) in the cash flows generated by income-producing real property. The cash flows provided by participation are classified as contingent interest and are intended to compensate the lender for additional risk exposure as well as the reduction in coupon rate. In this paper, we present a partial equilibrium wealth-maximizing model to estimate the extent of lender participation and an analysis of the factors affecting it. The results of formal comparative statics analysis show that the lender's percentage participation is, in general, positively related to changes in the loan-to-value ratio and threshold cash flows above which participation is payable. Among yet other results, a change in the contracted loan life has an ambiguous effect on the lender's percentage participation. Then, in an effort to resolve ambiguities in the comparative statics results, we employ a numerical procedure in conducting sensitivity analyses. This allows us to estimate percentage participation levels, and their elasticities, under various assumptions regarding the underlying factors. JEL Classification: G21, C65     

Bank and Nonbank Lenders and the Commercial Mortgage Market

This paper develops an equilibrium model of the commercial mortgage market that includes the sequence from commitment to origination and allows testing for differences by type of lender. From borrowers, loan demand is based on the income yield, capital gains, and expectations about return distributions. Lenders use prices such as mortgage rates and their distributions, and quantities in underwriting standards. There are separate equilibria in the markets for loan commitments and originations. Bank and nonbank lenders are not restricted to the same lending technology, nor to the weights placed on mortgage rates as opposed to underwriting standards. Empirical results for the United States commercial mortgage market indicate that banks use interest rates in allocating credit while nonbanks rely on underwriting standards, notably the loan-to-value ratio. A consequence is that nonbanks have a clientele incentive towards making low cap rate loans compensated by low loan-to-value ratios.     

Nondiscriminating Foreclosure and Voluntary Liquidating Costs

Since liquidation and bankruptcy are costly, researchers havetried to find out why the claimants of a troubled firm do notwork out a deal to avoid these costs. In this article we showthat if a creditor has to deal with multiple borrowers who mightdefault, it may be optimal for the creditor to randomly rejectrequests for a loan workout. We further demonstrate that theoptimal acceptance rate used by a creditor is positively relatedto the liquidating cost and negatively related to the defaultbenefit. Our model is particularly relevant when analyzing thedefault decisions of mortgage borrowers and small business owners.     

地理距离、契约设计与企业内部资本市场借贷风险防控——来自中国企业集团内部借贷交易的证据

地理因素对保持距离型市场交易的影响已被大量文献证实,但系统考察地理因素是否以及如何影响企业内部经济活动的研究仍十分匮乏。基于手工搜集整理的企业集团内部委托贷款这一独特数据,我们实证考察了地理距离对企业集团内部借贷契约设计的影响及相关的风险防控问题。实证结果显示,借贷距离越远,针对借款者的契约设计越严苛,不仅贷款者更可能要求借款者提供抵押担保,而且对资金用途施加限制的概率也大幅增加。进一步研究发现,与地理距离阻碍了信息搜集和监督的经济直觉一致,距离对企业内部借贷契约严苛性的推高作用会因为借贷双方之间的信息摩擦问题差异而改变。而且,基于借贷违约信息的检验结果表明,作为应对信息不对称的机制,动态调整契约严苛性这一精巧契约设计有效降低了企业内部贷款违约风险。本文不仅增进了对地理因素影响企业内部资本配置的认识,而且加深了对企业内部借贷契约设计的理解,从而对如何有效防控企业内部资本市场运作风险具有启示意义。     

Beyond the Transaction: Banks and Mortgage Default of Low‐Income Homebuyers

We evaluate the effects of the lending institution and soft information on mortgage loan performance for low‐income homebuyers. We find that even after controlling for the propensity of a borrower to get a loan from a local bank based on observable characteristics, those who receive a loan from a local bank branch are significantly less likely to become delinquent or default than other bank or nonbank borrowers, consistent with an unobserved information effect. These effects are most pronounced for loans originated to borrowers with marginal credit, where soft information may have a stronger effect. These findings support previous research on information‐driven lending, and provide additional explanation for observed differences in mortgage loan performance between bank and nonbank lenders.     

Discrimination in Lending: Theory and Evidence

Using a general equilibrium model of credit market discrimination, I find that both taste-based discrimination and statistical discrimination have similar predictions for the intergroup differences in loan terms. The commonly held view has been that if taste-based discrimination exists, loans approved to minority borrowers will have higher expected profitability than those to majorities with comparable credit background. I show that the validity of this profitability view depends crucially on how expected loan profitability is measured. I also show that taste-based discrimination must exist if loans to minority borrowers have higher expected rates of return or lower expected rates of default loss than those to majorities with the same exogenous characteristics observed by lender at the time of loan originations. My analysis suggests that the valid method to test for taste-based discrimination should be reduced-form regressions. Empirically, I fail to find supporting evidence for the existence of taste-based discrimination.     

Subprime Transitions: Lingering or Malingering in Default?

When a mortgage borrower becomes seriously delinquent (i.e., defaults), the lender initiates a time consuming and complex recovery process that may or may not result in foreclosure and eventual disposition of the real estate collateral (REO). This research studies this transition process for a unique sample of subprime mortgages that were seriously delinquent on September 30, 2001. Eight months later, possible states for the delinquent loans, in order, are 1)to remain delinquent without deteriorating further, 2) foreclosure, 3) worsen, i.e., become more months delinquent, 4) bankruptcy and 5) cure. The data indicate that, relative to prime loans, when subprime loans become seriously delinquent (90 days or longer) they are about twice as likely to become REO but take about four times longer to get there. It is unusual for a subprime default to be cured suggesting considerable forbearance by subprime lenders. We explore determinants of the transition probabilities and find that the most economically important predictors of transition from default to any other state are the number of payments the borrower has made and the loan to value ratio.     

Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans

This study recognizes that commercial mortgage default is not a one-step process and examines a previously under explored aspect in the whole default process, that is the stage between the initial delinquency and default. We distinguish the servicers’ behavior from the borrowers’ behavior. A multinomial logit model is applied to analyze the servicers’ choice of workout options and a proportional hazard model is applied to analyze the borrower’s default decision-making process under time-varying conditions. We find that cash flow condition is the most significant factor in the servicers’ decision making process. We also find that borrowers make default decisions based upon both the equity position in the mortgage and the cash flow condition in the space market. Key real estate space market variables, such as market-level vacancy rates, also provide useful information in explaining commercial mortgage defaults. We find that special service seems to be successful in reducing the probability that a troubled loan will default. Finally, sensitivity analysis shows nontrivial economic significance of the impact of explanatory variables, real estate market variables in particular have the most significant impact on the pricing of special-serviced loans.     

Tests of ex ante versus ex post theories of collateral using private and public information

Collateral is a widely used, but not well understood, debt contracting feature. Two broad strands of theoretical literature explain collateral as arising from the existence of either ex ante private information or ex post incentive problems between borrowers and lenders. However, the extant empirical literature has been unable to isolate each of these effects. This paper attempts to do so using a credit registry that is unique in that it allows the researcher to have access to some private information about borrower risk that is unobserved by the lender. The data also include public information about borrower risk, loan contract terms, and ex post performance for both secured and unsecured loans. The results suggest that the ex post theories of collateral are empirically dominant, although the ex ante theories are also valid for customers with short borrower–lender relations that are relatively unknown to the lender.